All too often owners of condominiums and properties that are part of a common interest development learn about HOA loss assessment insurance the hard way– that is, when the need arises after a loss and they find out that they either don’t have any coverage, or they don’t have an adequate amount of coverage.
Loss assessment coverage is insurance that is purchased by homeowners and not the homeowners association. It is not necessarily included in every homeowner’s policy, or if it is, it likely has a very limited amount of coverage (i.e. $1,000). Frequently, it is offered as additional optional coverage that is made available to homeowners. Loss assessment insurance is designed to protect homeowners against the risks of having to pay a special assessment that has been levied by their homeowners association on members to cover the cost of a loss that exceeded the limits of the association’s insurance coverage. The following are two examples of when loss assessment insurance would apply:
- A person suffers a serious injury on association property and sues the association for $3,000,000.00 and the association’s liability policy has a limit of $2,000,000.00. The association’s insurance company defends the case but does not settle, so the case goes to trial and the association loses. Now the association has a $3,000,000.00 judgment against it, and only $2,000,000.00 of insurance coverage to cover it (it could be less if part of the insurance goes to pay the association’s attorney’s fees). Where’s the additional $1,000,000.00 going to come from? It is going to have to be raised via a special assessment on all the homeowners. If this association has 100 separate interest owners, each owner would be assessed $10,000.00 to generate the additional $1,000,000.00 that is required to pay the judgment. Assuming a homeowner has loss assessment coverage in an amount that is $10,000.00, or more, that insurance would pay the owners’ portion of the special assessment. If the coverage had a $1,000.00 limit (as many policies do), the owner would have to personally pay the additional $9,000.00.
- The association’s clubhouse is damaged by a fire and the final cost to repair the damage exceeds the amount of the association’s insurance coverage for the loss by $50,000.00. Similar to the above example, the association would be required to levy a special assessment against all the homeowners to raise the difference between the limits of the association’s insurance coverage and the total amount of the loss caused by the fire.
The standard loss assessment coverage in a homeowner’s policy may or may not cover the owner’s portion of the deductible on the association’s insurance policy. Thus, if the association policy has a $50,000.00 deductible for property damage, that $50,000 is going to have to come from the homeowners and it may not be covered by the individual owner’s limited loss assessment coverage.
Loss assessment coverage is affordable insurance coverage that every owner of a separate interest in a common interest development should purchase. Because not all homeowner insurance policies include loss assessment coverage, or if they do it is generally in an insufficient amount, it is very important for homeowners and their personal insurance agents to make certain that it is included in their homeowner insurance policy. Additionally, because not all loss insurance coverage is the same, it is important to know the limits of the coverage (it typically ranges from $1,000.00 to $50,000.00). Because higher limits provide more protection for the homeowner, it is always best to get as much coverage as possible assuming affordability.
It is also important to note that the loss assessment coverage offered to individual homeowners is typically contingent on the homeowners association having proper insurance coverage in place that provides a certain amount of coverage for the loss that gave rise to the need for the special assessment. Thus, it is important for each individual homeowner (or their insurance agent or other advisor) to understand the nature and extent of the insurance coverage that their homeowners association has in place. This information should be provided by the association to the homeowners as directed by state statutes and the association’s governing documents, and homeowners should be proactive in making certain that they have received the information, reviewed it (or had it reviewed by a competent advisor), and in making sure that the personal coverage includes an appropriate amount of loss assessment coverage.
It is a good practice for homeowners associations to provide the homeowners with informational packets that include information on the insurance policies carried by the association and which explain the importance of every homeowner having their own insurance policy that includes loss assessment coverage. The topic should also be covered at membership meetings and/or in study groups or informal sessions that are designed to educate and promote involvement by the individual homeowners.